Real Estate, Speculation & “Occupancy Fraud”

Today’s WSJ had a run of Real Estate related articles that quite frankly, were rather surprising in their gentle naiveté.

The first is the somewhat surprised acknowledgment that speculators were involved in the run up and subsequent deflation of Housing prices.

Of course, every asset class attracts speculators when prices rapidly rise. Its why every big boom ends in a final blow off top — that’s the impact of late-to-the-party speculators — followed by the inevitable spectacular collapse.

The latest after-the-fact revision (see our discussion on "predatory borrowing") has a new name: occupancy
fraud.

This new nonsense word is a way to duck responsibility for failing to do appropriate due diligence prior to lending out money. Here are the details:

"As lenders pore over their defaulted mortgages, they
are learning that the number of people who bought homes as investments
is much greater than previously believed. Such borrowers turn up frequently in analyses of loans
that defaulted within months after origination. In many cases, these
speculators lied on loan applications, saying they intended to live in
the homes in order to obtain more favorable loan terms or failed to
provide the requested information.

Roughly 20% of mortgage fraud involved "occupancy
fraud," or borrowers falsely claiming they intended to live in a
property, according to an analysis by BasePoint Analytics, a provider
of fraud-detection solutions in Carlsbad, Calif. Another study, by
Fitch Ratings, looked at 45 subprime loans that defaulted within the
first 12 months even though the borrowers had good credit scores. In
two-thirds of the cases, borrowers said they intended to live in the
property but never moved in."

Speaking of fraud — I am curious about these lenders, now claiming they were defrauded by speculators. How many of them asked the following questions, and then did the due diligence to verify the data:

– Do you presently own your primary residence? – Is your home currently listed for sale? Or, are you in contract ? – What is the asking price? Who is your real estate agency? – RE Agent name? What’s their phone number?

Of course, none of these questions were asked, and no due diligence was performed, as these lenders were whoring clerking out loans as fast as they could process them. After the fact, this lack of due dilly has become "Occupancy Fraud."

If there was any genuine interest in not lending to speculators, its easy enough to verify . . .

>

>Not surprisingly, all of this unchecked speculation ended badly. This has led to a big upswing in empty houses:

"Nationwide, the homeowner-vacancy rate, which measures the number of
vacant homes for sale, rose to 2.8% in the fourth quarter, the Census
Bureau recently reported. That matches a record set in the first
quarter of 2007 and is the highest since the government began tracking
vacant homes in the 1960s.

The current vacancy rate could be the highest since the Great
Depression, when an exodus of Americans left the Dust Bowl states for
the West Coast, says Mark Zandi, chief economist at Moody’s
Economy.com.. Data "strongly suggest that vacancies are at their
highest level since the 1930s," he says, adding that the empty homes
aren’t only depressing property values, "they are weighing on the
collective psyche of communities. … It’s kind of like playing for a
losing team. It’s debilitating."

High vacancies in Florida, Nevada and California partly reflect
overbuilding during the housing boom along with rising foreclosures.
Cities in the Midwest have some of the highest vacancies, due not only
to foreclosures but also to weak economies and population declines. In
Cleveland, for example, the number of vacant homes has reached as many
as 12,000, about 10% of the city’s total housing stock, according to
the treasurer of Cuyahoga County, which includes Cleveland."

Previously:Ongoing Impact of the Housing SectorAssigning blame for all of the problems in the credit marketTuesday, August 28, 2007 | 11:45 AM http://bigpicture.typepad.com/comments/2007/08/the-ongoing-imp.html

>

Sources:Speculators May Have Accelerated Housing DownturnRising Number of Defaults Also Could Complicate Effort to Help HomeownersBy RUTH SIMON and MICHAEL CORKERYWSJ, February 6, 2008; Page B8http://online.wsj.com/article/SB120225852189145889.html

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What's been said:

Greenburg was a guest commentator on CNBC today. They had a piece with Olick and a rep from the Realtor’s Association. It was disclosed that mortgage lenders are still offering teaser ARMs and interest only loans. Herb said something to the effect that he couldn’t believe they were still doing that because that’s what has caused the current housing market mess. The rep said something to the effect that mortgage lenders are doing whatever is necessary to drum up business. Because of FED rate cuts, REFIs are up 17%. Greed marches on.

Lenders not bothering to act upon or even do a primitive statistical test to determine the validity of their assumptions (regarding their borrower’s ability to manage a loan) was plainly irresponsible. Banks writing down billions in losses is like watching your child crying after failing a test because they just didn’t want to do their homework. There seems to be a systemic failure in our population to accurately gauge many forms of risk (economic, environmental, military,) but we’re all going to pay for it…even those of us who were making very careful decisions along the way.

It’s amazing how many people are still trying to blame the credit crisis on “those people that lied on their applications”. I think it fits into some ideology, that individual behaviour cannot be controlled by the “powers that be”. However, this is a false belief since you can certainly take issue with the issuers (individuals) that did not do any due diligence and the regulators. The other false premise is that speculators and scammers took the investment banks and other investors for over $150 billion and counting. This woulod have put Nigeria out of business, if it were true.

Occupancy fraud is joke. I had a friend in the finance group at on of the largest, and still one of the best capitalized builders in the country, explain to me how these sales worked (this was about 1 year ago and refers to Austin, TX). While executive management prohibited sales to investors, sales managers were incentivized to look the other way when their employees sold homes to speculators. How do you know if you are selling to a speculator? I think the better question is, how do you NOT? These “buyers” often had addresses outside of the state and often would buy several houses within the same day. Sales people were more than happy to make the sale, I mean why turn down an easy dollar. And sales managers were more than happy to approve the sale as their bonuses were directly tied to the number of homes sold within their region. Now I don’t think there is anything wrong with selling homes to investors in and of itself, but blaming everyone possible and refusing to accept any responsibility for what was wholly their own fault is all together ridiculous. It reminds me of the trader over at Societe Generale whose actions were being ignored, if not loosely monitored, while they made money for the firm, but as soon as he lost, SG all of a sudden “realized” that he had been doing all these terrible, deceptive things.

Being robbed is one thing, but driving down to the ghetto, parking your car with the windows open, and leaving a box fulls of ipods and jewelry on the seat is another.

If you are running a public company, pleading ignorance is not a viable excuse, its a reason to get fired.

“these speculators lied on loan applications, saying they intended to live in the homes in order to obtain more favorable loan terms or failed to provide the requested information.”

I think they’ll find that this was about more than just trying to accumulate an investment property portfolio at more favorable terms.

The tremendous number of early defaults suggest serious fraud for profit activity, where values are inflated, and cash stripped from the lender at closing through illegal disbursements of loan proceeds back to the borrowers and other actors in the scheme. Once all the key actors are playing along (originator, realtor, appraiser, title company) it becomes a simple paperwork drill to take $100,000 at a pop from a lender.

For the lender, this means they are not only getting back a property that has lost value due to normal market forces, but whose original value/loan amount may have been an utter fiction in the first place.

“Today’s WSJ had a run of Real Estate related articles that quite frankly, were rather surprising in their gentle naiveté.”

“Naiveté?” Perhaps not. I think we are seeing the direction the WSJ is taking post-Murdoch.

As you point out, there was no due diligence done by these firms, yet somehow they are not to blame for the mess they put us in. Sounds to me like a lot of executives at other companies who blame everyone and everything but their own dumb ass policies for their failure.

I live in FL and have been trying to purchase a home for about 25 months; the problem, I saw this coming and have made what I thought were reasonable offers only to be ridiculed by realtors/owners for submitting an insulting offer. Now, most of those homes are still on the market, about 33% cheaper. To the point of misrepresentation by speculators: when doing due diligence on prospective homes, I noticed how many “investors” owned what are claimed to be homesteaded domiciles. I have echoed this comment before. It is the individual who is most culpable, end of discussion. As a further incentive besides cheaper mortgages, what gets overlooked are the tax implications of selling (flipping) a homestead opposed to an investment property. These amatures full well knew what they were doing. I wish the IRS would start reviewing this aspect, talk about a goldmine of revenue. Oh, by the way, I have a friend who owns 5 homesteaded properties, 3 of which in the same county. How can this be happening?

Going back to your earlier piece on the stages of grief, Denial is the motivator here. Can’t you just hear a grown up Bart Simpson saying “Not My Fault”. This denial doesn’t begin or end with the WSJ piece.

Has anyone noticed the visceral reactions I get for even suggesting that housing will begin to recover later this spring or summer. To me, this is just about as innocuous of a statement as “Have A Nice Day”. Others must read something very different.

My guess is that the ones who react the most strongly lost something in the speculative real estate frenzy. To them, the loss couldn’t have been their fault. It must have been the market or the economy or a regulator that went out of control and ruined them. Only something beyond the control of mere mortals could have done this to them. They’re too smart for this. It’s not their fault. It should have worked.

To suggest that a simple market up cycle in a couple of months will begin to save the day must make these people look inward and briefly see themselves honestly. They recognize their mistake in participating in the housing mania at some level at the worst possible time. These are the same people who would have paid thousands for a tulip a few hundred years ago.

Denial, followed by Anger at the terrible person who suggested their possible mistake is the reaction. Since so many screwed up so badly, they band together and share a mass support group. Thus the piling on when I describe the market and the economy as something less than mystical.

I can only imagine the Voodoo curses that will come my way after posting this.

“Naiveté?” Perhaps not. I think we are seeing the direction the WSJ is taking post-Murdoch.”

You wanna see WSJ post-Murdoch…? Look no further than the front page feature on the TV show, “24” from last week’s Weekend Edition. It might be fine on the weekend section, but where I live it ran on the front page of the main section.

My wife and I tried to buy a house in 1962 and were told by a loan officer that her income could only be considered if we could prove she had had a hysterectomy. We finally did get a house, and now we have grandchildren, ha!

I’ve been reading the blog for a long time and have really enjoyed the posts and commentary. Not one to really post on blogs, but since I’m in the mortgage industry I figured I’d give my 2 cents. Fraud is rampant in the industry, more then you will ever know. From lying about income, assets, occupancy, inflating credit scores….you name it, it happens.

A paper to Hard Money loans (below subprime) it happens more then anyone outside the industry cares to really discuss. Prior to my current job, I intervied at nearly 20 mortgage companies and I would say 80% of them openly discussed “how to get loans done” *(fraud).

There is a reason why that NO ONE wants mortgage paper on the secondary market….because it is not worth the ink used to print up the file or the hard drive disk space it takes up (not being funny).

We are still in the VERY early stages of this mess. Until the entire system is revamped or collapses completely it will still go on. Did you know you have to go through more training to become a barber then a loan officer? Think about it. This is the biggest transaction most Americans will ever make and most the time the Loan Officer is not Lic. by the state and he/she just quit hi 7-11 minimum wage job to score the “big paycheck” in the mortgage industry.

Before you go blame every Loan Officer/Mortgage company out there, the other side of the coin is consumers do not do enough to protect themselves and they tend to want to believe the “too good to be true loan terms”. I’ve lost so many deals over the years because another loan officer quoted unrealistic numbers ( or fraud was committed to get a better terms) and the client does not even take the time to research the company online or verify if the Loan Officer is lic. by the state or question how the Loan Officer is structuring the loan.

Homeowners are very willing participants in lying to get a better deal. I’ve had potential clients call and say they make a certain amount but they know they’ll need to state a higher amount on the loan application to lower their debt-to-income ratio to get a better loan. Again this is from the client and even when you tell them it’s fraud, they don’t care.

So the problems we face for the next few years were created by homeowners to willing to commit, Loan Officers to willing to help and mortgage companies to willing to allow it to happen. Until this cycle has completely stopped, the problems will continue.

My feeling is lenders were very slow in putting fraud protection in place because if they go too crazy with it, loan volume will drop dramaticaly. Until you see default rates on A-paper debt at 30-40% levels, more homeowners okay with walking away from a home thats worth half of what they owe then you really wont see much change from todays standards.

My guess is that we will see 30%-50% plus declines in home values in the next 2 years as the economy weakens, lenders become more restrictive and default rates sky rocket. As for default rates: In 2005 CA had somewhere in the neighborhood of 30k default notices, and a very small percentage of those went to foreclosure. 2007 that jumped to (est.) 300k-350k and a similar increase in the % of foreclosures.

Now what do you think will happen when all the resets take place (which really only started in Oct. 2007 and wont start appearing in default notices until spring time)for the next 2 years?

cinefoz, we react so strongly to your comments because they are ridiculous. You keep saying housing is going to recover, but lend no support for your thesis…especially when it flies in the fact of all the facts available to anyone with a keyboard.

For instance, how can we have a “simple market up cycle” when we still have to work out the excesses of the past three-year “fraud-induced ridiculous off-the-charts up cycle”?

BTW, I know that the housing bulls like yourself are touting the skyrocketing mortgage app increases….problem is, from what I’ve been seeing, people are applying but can get funding from any of the lenders due to their tightening credit standards. Kinda ironic, isn’t it, that mortgage rates are again at historic lows, but noone qualifies for them anymore….

Yeah, the banks and institutions certainly deserve a great big heaping share of the blame, but – in a free society – so do the borrowers, regardless of whether they were guilty of mild avarice or grand mal fraud. Call me a cold-hearted bastard, but I find it hard to generate even fleeting compassion for any of the persons involved in this mess, regardless of which side of the fraud – er, I mean the *trade* – they were on. Whatever happened to “caveat emptor” (which applies to everyone, really)??

The trouble with a situation like the one that we’ve been watching develop is that, viewed objectively and rationally, it’s very hard to work up any sympathy whatsoever for even a single one of the participants. No one is innocent. All involved – the banks, the originators, the salesmen, the realtors, the builders, the institutions that repackaged and sold mortgages, the institutions that bought said mortgages, the rating agencies, the Fed, the esteemed reprobates in the Congress, the media (that means you – Kudlow!), the realtors, the speculators, and even your cousin Fred who thought this was his one chance to buy his dream “home” – either knew better than to do what they did, or *should have* known better. Nobody gets away scott-free (except for the curiously orange Mozillo).

Personally, I think it’s part and parcel of the national “holiday from history” that we’ve been on for the last decade-and-a-half, which is itself the product of the national IQ die-off that began partway through the first Bush administration. Willem Buiter is only partly correct: we *are* in denial, but we’ve also become almost willfully stupid.

But that’s just my opinion. And it’s free, so you know what that’s worth.

Too little too late, I guess. But I know some home builders were actually making people sign documents that said they would occupy the house and would not sell it for 6 months or something like that. I want to say it was Toll or Hovnanian. Whoever they were, they were the same guys that made you get a rate quote from their approved lender (for about $300, which you paid no matter what).

Don’t expect to see much good news reporting from the WSJ anymore. Rupert Murdoch does not believe in good news reporting. It does not fit into his business plan. From now on it will be varying degrees and flavors of lies, sort of the Mad Cow Disease of financial reportage. Yum Yum.

I used to work as a loan officer for one of the big mortgage originators in this country (I left for business school in ’06 after foreseeing the housing meltdown) and I believe I can provide some inside info in regards to investment property buyers.
In short, the fault lies on both sides, sellers and lenders were both driving by greed and given the markets appetite for RMBS and CDO’s, it was very easy for both to cash in.
Now why would a borrower lie? Answer: Interest Rates, Down Payment requirements and asset reserves. Due to risk, the pricing on a mortgage is different for a primary property versus an investment property (.5% to 3% higher depending on credit and down payment) and down payment was required to be at least 10% but typically without 20% it was almost impossible to get an approval without 700+ credit and significant reserves. Borrowers were required to have six months of reserves for all outstanding mortgage payments.
So borrowers had a huge incentive to try and put through a property as a new primary versus an investment property. At the same time, lenders also had an incentive to get it through as a new primary as many borrowers could never actually qualify to buy an investment property, usually due to lack of down payment and not meeting reserve requirements.
And contrary to what some may believe, there were measures in place to spot borrowers attempting to take such actions. Whether these were followed by lenders is another question, but where I worked we wouldn’t put it through and my underwriters would never approve anything that was suspicious and here is how we looked for investment properties posing as primaries:
-Do you presently own your primary residence?
For any mortgage application, we have to pull credit and given that most people don’t completely own their current home, a mortgage or lien will show up on a borrower’s credit report. Any mortgage pulling up on credit must then be associated with a property. After matching the properties with the liens we would ask:
– Is your home currently listed for sale? Or, are you in contract?
If they said yes, the underwriter would require that we see a proof of sale for their existing home prior to closing on the new loan. If they wanted to close prior to the sale, they would then have to qualify for the new mortgage and their existing one. They would also have to provide proof that they were selling their current home, like a listing.
-What is the asking price? Who is your real estate agency?
Usually when people buy a new home they get something bigger. So if someone was buying a home at the same or lower price/value of their existing home, it would usually raise a flag. Of course, once it was caught that the property was an investment and we told the borrower the new rate, they usually said no thanks and would go to the next lender. And if they had half a brain, they would just lower the value of their current property to reduce suspicion; they could easily go to another lender and tell them their current property is worth less that what it is really worth.
There were countless other angles that borrowers and lenders would use to manipulate the system and I don’t have time to list them all. Like any bubble there was a lot of speculation going on and people were more concerned about profits then due diligence. My company was one of the better ones, but even still I doubt we caught all the bad mortgages and I suspect there were some bad apples somewhere within the ranks as well.

1) The borrowers for lying their asses off about their ability to pay and their intentions for the property….and profiting from it.

2) The Originators for enabling the borrowers and then profiting from it.

3) The ratings agencies for assigning the high ratings of the securitized MBS containing these shitty mortgages and profiting from it.

4) The IBs for pressuring the ratings agencies and also selling this shit to investors and profiting from it.

5) The investors who failed to do their own due dilly and lapping this stuff up as fast as the IB, and Originators could generate it.

These are people who should have to foot the bill for this madness, and should the government decide to stay out of it…they will. Everyone is collectively holding their breath with me on this one I am sure.

Mortgage guy: On a side note, can you imagine if a CEO of a bank or homebuilder had a crystal ball 3 years ago that showed the mess that we are in now. He would have been fired by now because the investors in his stock would have run him out of town for not participating in the boom. Funny how stuff like that works. IMO this whole real estate debacle was a group effort. From the shareholders groping for short term momentum, down to the home speculators that watched a little too much “Flip this House”.

Anybody have any thoughts on the next area that is currently getting thrown a little too much capital. My guess is Ag, emerging markets and commodities.

When the housing market start to rise again, and all other markets rise along with it in a very short while, this recovery will be viewed by those incompetents who tried to game the system as objective confirmation of their personal failure. How do you feel about this?

I am a Real Estate Broker in Northern Virginia.I believe that the VAST majority of our “distressed inventory” was caused by fraud-with both mortgage brokers and my “fellow” Realtors to blame. Yes, there was an unbelieveable amount of “fraud for housing” with the no-doc loans.I have NO sympathy for the banks on that one-totally self inflicted. My angst with my industry involves the “cash back fraud” and “occup[ancy fraud” that has now decimated some new home communities. After being approached by another agent to raise the price of my listing 70k, with the seller then stroking a check to the buyer “outside settlement”, I took an interest in doing some investigating. That particular agent had pulled this off at least 12 times in the last year. The usual method is to withdraw the listing from MLS, relist it at 60-150k higher and then show a debit on the sellers side of the HUD-1 for that amount-making it look like an old lien that the seller owed-lest a closer at the bank give more than a cursory glance at the HUD-1. The title company(crooked) then disburses back to the buyer and I assume that the (crooked) appraiser gets a cut too. Of the first 12 I found, 7 are in/foreclosed upon.
My Board of Realtors seems disinterested.I have since found at least 50 more cases involving other agents. I HAVE informed the appropriate authorities. The REALLY disturbing part is that 50 of my “fellow” Realtors saw nothing wrong with this and cooperated. One LARGE company here even appears to have taken the position that “they had an obligation” to do the deal-if thats what their clients(sellers)wanted. I am NOT PROUD to be in the same group as these criminals. I hope that our associations/NAR are forced by the ugly facts that will be revealed during the post mortem of this period to explain why they failed to educate their members that breaking the law was wrong.

If one out of 5 buyers is in fact a speculator, then that must have some sort of geometric effect on prices.
Not sure how you quantify it, but the resultant price inflation must be far in excess of a direct linear correlation. And of course, these 20%+ numbers are only the confirmed cases. In reality it is probably even greater, especially if you factor in true primary home buyers who were in fact more motivated by greed/speculation.

Cinefoz,
I dont usually respond to you, however: You have stated your “opinions” many times. So why care what the responses are? We know you are long (equities)and looking to buy a house right? Since the housing bottom will be in the next few months.

So no need to read this, since you are so sure of your “opinions”.. but for the rest of you.. This housing boom was unprecidented and a ‘perfect storm’.
Cheap money, downstream investors buying up crap paper, frenzied buyers who thought they would miss out, if they didnt buy now, unbelievable relaxing of lending standards, and now higher home ownership than ever in our country.

So, who is going to buy all these available houses in the next 6 months? Even if rates are %5.0, those loans are GONE!!!! Homes in California doubled and tripled in price in just 5-6 years, and you think a 20% correction marks the bottom?

Things will get much worse before they get better, at least 2009-2010, and then homes will just flatline for awhile. Ok, so there, there is my opinion. I sold an expensive home in California in late 2005 and moved out of state. I bought a much cheaper home elsewhere, So if you are correct Cinefoz, then I will loose alot of potential money. I’ll take that chance.

Good luck on your long positions, hhhmm, that CSCO call must of not been to good, ES minis just dropped 16 points in after hours trading, (1321.25 as I type this). 🙂

You’re so right. That’s why getting rid of the IB CEO’s over the last few months is a total joke. Investors would have been furious if they did not take part in the bubble.

Someone said I should short Adobe last summer when the industry started melting away. I asked why? “Adobe Photo shop is the mortgage industries best friend. No loans to do, no reason to buy Photo Shop” I’m sure he was kidding about the importance of the mortgage industry to ADBE, but he was not kidding about the importantce of Photo Shop to the mortgage industry.

“When the housing market start to rise again, and all other markets rise along with it in a very short while, this recovery will be viewed by those incompetents who tried to game the system as objective confirmation of their personal failure.”

Hmmmmm, when I didn’t get liquid in 2000, yes, I viewed that as a personal failure since I saw all the signs but didn’t act. I see the same signs, far worse today in real estate because of the leverage involved, and I’ve acted on it this time. If I’m wrong this time, I won’t have problem because I acted on what I considered at the time my best reasoning. Worst case, I’ll miss some upside, yes, but that’s a price I’m happy to pay to avoid what I cannot imagine is the downside risk.

cinefoz, it seems as though your the one who is taking things awfully personally. If your betting your ass off on markets shaking these problems off, more power to you. I wish you well. I’m on the other side but I don’t have a problem with you winning if I’m wrong. Heck, I HOPE I am wrong and these problems don’t add up to much.

It isn’t personal (at least for me). I believe strongly that things aren’t going to go well in any market for a while. But I’ve been wrong before and I could be wrong now. Either way, I’ll be back in the game when this stuff shakes out a bit.

cinefoz,
At best the housing market will stabilize and we’ll have 5+ years of close to 0-1% growth. At worst it will decline 40% from the top, I’m targeting the ~25% decline from top. Regardless, anyway you look at it, in real inflation adjusted terms it’s going to fall for at least the next 5 years.

Housing markets are cyclical, over the past 100 years the cycle is roughly 18 years, some 15 years, some 20, but it’s around 18 years from peak to peak. So unless you think it’s different this time, it’s not coming back for a long time (2012 or so). The only thing that makes it different is the massive run-up in the last 3 years of the boom, which doesn’t help your cause.

Please, I need to smoke whatever you are doing, that must be some good stuff!

Actually I’m looking to refinance my 15 5.1% which is down to nine years left. Shoot, bring em’ down Benny! A five year 1%?? Hey, just doing my part?

Your right though, wait until everybody figures out it’s slowing down. You can’t talk it up. What is truly a laugher to me is that now bullish types blaming the media for the downturn. I knew this housing bust was coming 2-3 years ago. It was…Obvious…to those who where looking.
It’s all America had to drive consumption,..and boy did we consume. This hangover is going to be a doozy! My point is, the media was still late to the party on this and was in no way the cause of this down turn. It’s sad how media is bought and sold and watching somethng like CNBC is like watching a bad reality show. It’s embarrasing to watch these stooges come out and act like they have a brain when we all know their head is up some corporations ass. I feel bad for them.

Here is a shout out to Rick Santelli. Rick, stay away from the light Man! You’ve been so sweet lately. C’mon, your the Fonz of that otherwise crappy show! At the end of the day, we need you eating some of that corporate pimp ass like Cramer to keep our sanity! AYYYY!

cinefoz emailed me privately to mention that just before the housing bust, he sold his house and lived in a box. So, he’s 100% cash right now. But after the Case/Schiller index registers its first monthly gain, he’ll be sure to post a message informing us that he went to 100% house for that month.

cinefoz,
I have to admit that, strictly in dollar terms, you may be right about the housing market and the stock market. The way the fed is inflating the currency, a house presently overvalued at $500,000 may be under valued at $600,000 next year.
The Zimbabwe stock market rose more in percentage than any other world market. Of course, their currency had 30 or 40 thousand % inflation. So in real terms, their stocks went down.
Perception management has its’ limits. We seem to be arriving at a point where the government will raise the chocolate ration from 40 grams a week to 35 grams a week and the newspapers all cheer this benevolence (from Orwell 1984). The people, however, look at each other and say: HUH?

I have no objections to individual responsibility, nor am I suggesting individuals shouldn’t be held responsible for their actions.

Your bar analogy misses my point. An environment was created that not only encouraged certain behaviors from home buyers but was designed to increase the number of home buyers which could only be done by lowering lending standards.

What warnings were there about this situation for the general home-buying public? Few to none. It was touted not warned against. People entering that bar had very little warning against the dangers.

A better analogy would be the tobacco industry prior to the surgeon general’s report where smoking was cool, hip; hell they even had doctors in ads selling the stuff.

The real estate industry brought this on themselves and the Fed did nothing to regulate a situation they could and should.

While individual home owners may have exhibited greed they did not create the conditions that led to this mess. A loan that couldn’t be repaid could have and should have been stopped long before closing.

The Surgeon General’s warning has been on cigarette packs for nearly half a century. Yet millions of Americans still choose to smoke.

Be honest now; how many of those borrowers do you believe really didn’t know how much their monthly payments would be or how long the loan term was for?

Let’s face it; they knew what they were doing. They just ‘expected’ the value of the property to appreciate. They chose poorly.

You cannot stop stupid and irresponsible people from making poor choices and harming themselves.

I agree with most of the posters here who have no sympathy for any of the players involved in the subprime/fraud mess.

I hope they all stew in their own juices.

I merely resent the fact that as a responsible taxpayer who takes on only such financial obligations as I can afford, I will be forced (by my government) to bail-out all the stupid and irresponsible players in this mess.

I believe the situation is referred to as “screwed without the benefits of intercourse.”

Techy, IMO the stock market can definitely recover without housing. I suspect that the stock market will start to move up and delink somewhat with real estate once the credit markets have a solid handle on what some of these mortgage securities are actually worth. A monoline solution would be a good start to the valuation process.

It’s a CONSPIRACY, the entire event was ENGINEERED. Director of HUD (Catherine Austin Fitts) the fiduciary under BUSH 1 left because she understood the nature of the plan. She tours labeling it as the Tape Worm Economy, free money from the destruction of neighborhoods. Once the provisions of Glass Steagall were gutted in the name of “financial innovation” by Graham Leach the conduit was created by which credit could be extended to those who could obviously never repay, via capital from pension funds, hedge funds, all manner of investment vehicles, as they would be purchasing the securities backed by these loans Credit creation outside the realm of the FED supervision. Pre Graham banks for the most part were stuck with bad loans, not any more, unless they were foolish enough to trade this paper amongst themselves. Once the conduit was created for the debt extension, driving rates down to 1% and holding them there was the catalyst for the mania. Of course I lean toward the conspiritorial but it seems impossable for me to accept that FED regulators and banking officials could not project the outcome.

Once the fallicy of perpetually increasing asset prices was broadcast to the general public, cheap money overrules common sense to a certain percentage of the population, this is a given. and the reason the rules were implemented post Depression in the first place. I liken it to baiting a bear.

Well success we’ve caught one hell of a bear. Was the whole debaucle simple greed or a more nefarious plan in which to induce enough pain to make the citizenry compliant to something which they otherwise would not accept? The answer to that I suspect comming shortly to a neighborhood near you.

Glad I got that off my chest probably just the rediculous musings of a delusional mind.

I actually agree with almost all of what you say, especially your last three points.

However, I’d change “You cannot stop stupid and irresponsible people from making poor choices and harming themselves.” to “You cannot stop people from making poor choices and harming themselves.”

And you asked “Be honest now; how many of those borrowers do you believe really didn’t know how much their monthly payments would be or how long the loan term was for?” I believe a lot of them did not understand the terms and conditions or what they were getting into.

Hell, I live in an upper middle class neighborhood (according to the IRS) and work with well-educated people, and I am constantly astounded at how poorly people understand things financial.

And the tobacco/alcohol analogy may not have been the best since addiction muddies it. So I’ll try another.

“Pool Shark” is an interesting handle. And unless you mean a blowup toy in a swimming pool, it might illustrate my point better. A pool shark hangs out in a pool hall or a bar often with his buddies setting up the conditions, the environment that would allow them to make a lot of money. “Pool Shark” does not just imply someone who is a good pool player but someone who creates an environment conducive to the other person losing and if the shark is really good the loser will be happy thinking he had a fun game and the shark got lucky.

So yes indeed I think a lot of innocent people got fleeced. I also think a lot of not so innocent people got fleeced.

And while I have sympathy for many and can empathize with many, I sure as heck don’t want the behavior being rewarded with my tax dollars. It further pisses me off that someone like Mozilo walks away with a pile of cash acting like none of this was his fault.

the real shame of this particular phenomenon is there are plenty of people who just wanted to live their lives by getting married, having a family and settling down and owning a home with 20% down and a traditional mortgage who are ‘playing’ alongside the destructive speculators. sure speculators get burned but that’s the risk reward game but what about the others?

Stormrunner, I heard Catherine Austin Fitts on a radio show a while back. I make no claim to be any kind of financial expert but what she said made at least as much sense as what Cramer or Larry Kudlow come up with. Yep, my tinfoil hat fits very well.

I’m not sure what this authors credibility is but we seem to be living in the same reality. (I really don’t have any, credential that is, just watching the implosion seeking answers)

>>Twenty-five years ago, when most economists were extolling the virtues of financial deregulation and innovation, a maverick named Hyman P. Minsky maintained a more negative view of Wall Street; in fact, he noted that bankers, traders, and other financiers periodically played the role of arsonists, setting the entire economy ablaze. Wall Street encouraged businesses and individuals to take on too much risk, he believed, generating ruinous boom-and-bust cycles. The only way to break this pattern was for the government to step in and regulate the moneymen.

Many of Minsky’s colleagues regarded his “financial-instability hypothesis,” which he first developed in the nineteen-sixties, as radical, if not crackpot.

gary – you really believe that people didn’t know what they were getting into??? Come on, what happened to individual responsibility in this country. People have to take responsibility for their own actions….PERIOD.

Unless the ‘pool shark’ drove around town forcing unsuspecting citizens into his car, forcibly driving them to the local pool hall and compelling them to wager their cash on games of skill played against him; I would say the ‘pool shark’ analogy is inappropriate. Those who voluntarily wager on games of skill against an unknown and unmeasured opponent deserve whatever results they obtain. Don’t hang around pool halls with large sums of cash unless you’re quite good at what you do.

I would indeed feel sorry for any unfortunate homeowners who were abducted by savage mortgage brokers and driven to the local title company where they were forced by threats of physical violence to sign on the dotted line.

However, I have yet to hear of any complaints along these lines. rather, these borrowers located a coveted property and voluntarily sought out a lender. They voluntarily made a financial decision which, in retrospect, turned out to be very foolish. It is neither my, nor society’s resposibility to shield them from the consequences of their bad financial decisions. The same goes to the brokers, lenders, and investors who bought the suspect paper.

Our entire culture is daily bombarded with advertisements for everything from Phalus enlargement pills to fat-laden foods. It is up to each individual to resist these siren songs and act responsibly.

Indeed, if you really stop to think about it; it is the individual’s right to make financial mistakes that makes western capitalist democracies work. If nobody thought they could make a financially advantageous deal in the marketplace, our economy would grind to a screeching halt.

It is in fact (as Daniel Fessler likes to put it) the daily quest of each of us getting up each day and padding off into the marketplace in search of a ‘sucker’ that makes the capitalist system work.

btw, “Pool Shark is indeed a reference to water combined with my chosen profession relating to the law.

I have little sympathy also for the comatose borrowers, its about collateral damage, the big picture, the overbuilding, the malinvestment, the loss of jobs for even those with previously stable income, just so as that fees and commissions and bonuses could be generated by the few hip to the sceme while retirement plans get raped during a period when the boomers are retiring and SS is in a fog.

Of course if the boom didn’t occur maybe the jobs won’t have been created – or maybe they would, and in ares creating a real productivity boost rather than inflating a non productive asset which translates to scam.

Example, I went to Argentina in May. 1st thing you do is change money, so after getting my passport stamped and BEFORE customs, I saw a currency exchange booth. I changed over some money at hefty a premium 30%. Not but 50 feet and around the corner out of sight was a National Bank that would change money without a premium. Boy did I feel like an idiot.

Granted, there were signs advising travelers in spanish that the bank was outside of customs. I unfortunately misread the sign and thought the premium exchange was the bank they were referring to.

I reminded myself I wasn’t in Kansas anymore. After that I didn’t get bamboozled the rest of the 4-week trip.

You know after reading all of these posts, it seems everyone is aware that we have a very serious problem with enough blame to go around for everyone; but, no one seems to mention very much that we have government agencies that are supposed to do nothing except prevent these kinds of things from ever getting this far. They have been asleep for the last 10 years.

The silence to me is absolutely deafening and convinces me totally of collusion and down-right corruption. A heck of allot of heads should be rolling right now; but, strangely you don’t hear a damn thing about prosecution or wrong-doing. These bastards should be held accountable for not doing their jobs.

Why is the little guy held accountable but the higher up mucky mucks making big money, $1 million bonuses and apparently not doing anything constructive day in and day out allowed to skate when the damage to the citizens and Country as a whole are so great? I don’t buy the deal about the borrowers lying on their loan application. The lender knows full well that he is being paid to verify everything on that application is accurate. That was not done because everyone was in on the gig from the Real Estate agent to the financial houses who were securitizing the crap. It was in everyone’s best interest to ask no questions and look the other way.

The whole thing stinks to high heaven! Why aren’t people going to jail right now? You have all been talking about all of this gross misconduct; but nobody is being held accountable. Wouldn’t you think that just might be part of the problem? And to think some commentators even now get on CNBC and cry and moan about Sarbanes-Oxley. Sadly, it is going to be very hard to legislate business ethics to a bunch of crooks. How long is it going to take before our Government and these watch-dog agencies realize how serious this problem may become at the very time we are relying on the rest of the world to supply our habit. You know the pusher kills the junkie who stiffs him on the money. This thing may end badly.

My apologies. I did not think I was misquoting you. Frankly, I thought I was agreeing you. Won’t happen again.

Also, you said “BTW, are you Gary, bob, or Bruce, cause ‘71.234.79.1’ posts under all 3 names . . . and thats frowned upon here also.”

Are you saying that my posts are showing as being from ‘71.234.79.1’? That shouldn’t be. That address space is shown as being assigned to Comcast and I was definitely not posting early from an address owned by Comcast. This post shouldn’t be from there either.

Friends were talking over the weekend, and here’s an analogy we came up with. The individual borrower is like the guy who goes down to the auto dealer to buy a car, and possibly the money to buy the car. The dealer knows the cars and the money better than the average guy, or he’d be out of business. The various realtors, mortgage brokers, loan officers and so on are the country’s ‘dealership’ for houses and the money to buy them. I guess the Fed would be the police department.

Seems to me like a whole lot of drunk teenagers showed up at dealerships over the last three years, and the dealers were happy to throw everyone keys, expecting the loan payments to come rolling in. I’m not saying the buyers weren’t at fault for driving drunk, but I’d assess more blame on the dealers who gave them the keys and pushed them out the door, and the various policemen who stood by.

“The trouble with a situation like the one that we’ve been watching develop is that, viewed objectively and rationally, it’s very hard to work up any sympathy whatsoever for even a single one of the participants. No one is innocent.”

I would argue that there are innocents. When a market is corrupted by bad actors, it makes homes unaffordable to people who DON’T lie on their mortgage applications. It takes a competitive edge away from mortgage lenders who DO practice due diligence. And instead of a well-regulated market where people can buy homes for the basic necessity of putting a roof over their heads, you get a situation where a lot of people are hurt. Speaking of which, where were the regulators in all this? Where was the SEC? The Comptroller of the Currency? The Fed? The ratings agencies?

so what if people who treat our water begin to think they could save money by only treating it three days a week, after all you can buy a kit to check your own water and treat it yourself if you have to; same with drugs, airplane mechanics, auto mechanics, carpenters…these are the kinds of jobs people have who bought these houses and were screwed by their own greed and with the help of mortgage brokers, and big shots telling them what it was ok to sell. So if this kind of buyer beware gets into all the other facets of life watch out, all the smart ass lawyers in the f-cking world will not be able to put humpty dumpty back together.
I get a kick out of people acting like the financially ignorant are such pathetic schmucks but shit these are the people who do all the other things it takes to run our world, things you really depend on to be there and to be done right. How much do these financial geniuses know about other peoples jobs???
If a carpenter comes out and hangs your door upside down and it only opens the wrong way is that your fault. you sat and told him you like to be called ‘pool shark’ makes you feel, what? dangerous? please.

Folks, respectfully, I don’t know why we’re jabbering on and on about this. BR’s pieces (on several occasions) gave a fairly complete list of causes. Yet, many of the comments focus on one wrongdoer or another, as though one were at fault *almost* to the exclusion of others.

Despite several posts by individuals claiming to be industry insiders knowledgable about rampant “aiding and abetting” in the commission of fraud, some of you seem to want to blame the borrower to the exclusion of the rest of the parties involved. If you’re going to talk about “individual responsibility”, remember that the individuals working and running the banks are individuals, too. And, if you believe some of the posts on this board, they were mostly aware. You’re being myopic.

67 comments (mostly) for this??

Personally, I think everyone BR mentioned is at fault. In response, what I would like to see is:
– hiring prosecutors and building jails to fine and/or incarcerate everyone who participated in any fraud that broke criminal laws,
– lenders and borrowers suing/counter-suing each other, to establish who defrauded whom, and
– a return of adult regulators.

(If it’s not absolutely clear, the above means “no bailout for anyone”. There is a 3rd branch of government called “the court system”. If the fraud is civil and not criminal, let the bastards sort it out themselves at their own expense.)

Failure to punish crooks is moral hazard and perpetuates misallocation of capital (which robs us of some of the benefits of capitalism) and crime.

cinefoz, please address the question of “how will housing turn around or at least not tank by another 25% like most people here believe?” I *think* I can guess your answer. But, I really would like to hear your answer, too.

My guess is the same as AGG’s: whether houses tank 25% in real terms isn’t as important as what happens in nominal terms. With the *record* rate cutting, people just might be willing to lend again. The counterargument to this is: it’s long-term rates that matter and they ain’t coming down. Do you have a counter-counterargument to that? Please disclose.

There are so many ways to depth-sound where the bottom is ahead of us:

way 1) what are comps renting for? A sustainable sale price should be 7-15 times annual rental income.

way 2) what can the mean income buyer in that zip code afford in a loan if no fraud is involved? A lot of these counties in CA that were selling for 600k the mean is 55k a year. That’s 250k for a house, max. The price of real estate in the end, in a healthy market, is what the market will bear. Easy to compute that. If you feel generous and think the house is above average, use a standard deviation higher than the mean for the computation.

way 3) eyeball a chart of house prices over 50 years. A child could see where the stable spot is going to be. (after a rebound)

way 4) look at the ARM reset charts, add six months, minimum, lag for foreclosures to work their way through the system, depressing prices as they go on the market REO. In heavily bad-loan areas, prices will not stabilize until these houses work their way out of the system.

I use the word stabilize instead of “recover” because what is happening now IS the recovery. Prices need to recover to reasonable ranges.

The lender has more responsibility, due to strength, superior knowledge and bargaining power.

Contract law recognizes these kind of situations between unequal parties.

For a contract to be treated as a contract of adhesion, it must be presented on a standard form on a ‘take it or leave it’ basis, and give the purchaser no ability to negotiate because of their unequal bargaining position. The special scrutiny given to contracts of adhesion can be performed in a number of ways:

* If the term was outside of the reasonable expectations of the person who did not write the contract, and if the parties were contracting on an unequal basis, then it will not be enforceable. The reasonable expectation is assessed objectively, looking at the prominence of the term, the purpose of the term and the circumstances surrounding acceptance of the contract.
* Section 211 of the American Law Institute’s Restatement (Second) of Contracts, which has persuasive though non-binding force in courts, provides:

Where the other party has reason to believe that the party manifesting such assent would not do so if he knew that the writing contained a particular term, the term is not part of the agreement.

This is a subjective test focusing on the mind of the seller and has been adopted by only a few state courts.

* The doctrine of unconscionability which is a fact-specific doctrine arising from equitable principles. Unconscionability in standard form contracts usually arises where there is an “absence of meaningful choice on the part of one party due to one-sided contract provisions, together with terms which are so oppressive that no reasonable person would make them and no fair and honest person would accept them.” (Fanning v. Fritz’s Pontiac-Cadillac-Buick Inc.)http://en.wikipedia.org/wiki/Standard_form_contract

The borrowers here have some responsibilty, but that is only secondary compared to the lender’s responsibility

Stupid borrowers, crooked borrowers.. you name the kind, they have always existed, and always will. They wish to take a loan. And they can wish for a pony too.

It seems to me that nothing short of a revolution in the way we operate will stop this from happening again.

What senior executive in their ‘right mind’ would forego their obscene bonuses in the short term, all the while knowing full well the carnage at the end of the rainbow? For every Buffet there’s a hundred Mozilo’s.

I have a hard time imagining industry veterans believing the shit they were shoveling (ie: “this time it’s different”). They were grabbing as much as they could until the music stopped; and they knew it would eventually stop.

As long as you didn’t gorge yourself like Mr. CFC, I imagine you’ll be allowed to slip into obscurity with your hookers, yachts and cocaine.

As I quickly scanned all the comments on this I didn’t come across the real reason these mortgages were getting done. What’s a person making that generates a $600,000 mortgage for someone making $50k? If this is a big number, all why and how questions would appear to be answered.

reply … Like a snowball rolling down a hill that grows in size as it continues on its way. Lower rates and a sense that prices have bottomed in most markets will bring buyers. Stability invites risk. As buyers enter the market, more buyers will be attracted. Stocks will rise when statistics are announced that the tide is rising. Spring and summer is a traditional time for high housing demand.

Adam Smith’s invisible hand is at work here.

I think there are idiots here who think a million buyers will arrive all at once from Mars who will immediately rescue California’s out of control market. Nobody is coming to rescue the tulip buyers.

Unfortunately, the snowball is not even half way down the hill. As Herb Greenberg so succinctly stated in his post of 1/30/08, “It’s Affordability, Stupid! … In many parts of this country, houses are still out of reach of most Americans”

Even with very low interest rates, house prices that doubled due to wild speculation must drop to a level where people can afford them under the current rules. And that implies prices have much further to fall. If that price adjustment can occur by spring, then that will be when the housing market can begin to turn.

Does anyone know whether such frauds if proven would let the credit insurers off the hook?

Rather than examining frauds past, it may be more useful to reflect on the PRESENT possibility of foreclosure fraud: this is where bank employees in cahoots with property speculators ‘arrange’ things (eg with inaccurate descriptions at auction ‘by mistake’) so that the property is bought far too cheap: after all it is only those ‘stupid’ CDO investors and bond insurers who are on the hook…

Barry, I bought a second home that I used as an office. The LENDERS put in the mortgage it was my primary residence even though they damned well knew it was not. I thought it got me a cheaper rate so I went along for the ride.

I sold the property for a 10% loss a year ago, so much for real estate never going down.

Barry, I do take issue with the blanket blame of “borrowers.” Of course, fast-talking flippers should be boiled in oil, and fraud is fraud. But consider this: if we threw all the lying borrowers in jail, would that have prevented the bubble? Also, shouldn’t the lenders have the due-diligence infrastructure to weed out bad borrowers? I think they once did. Back when houses were 3x income…

Yes the poor bankers were bamboozled by all those dishonest borrowers. Ha! what a crock. This should be no surprise to anyone. Mortgage brokers down here in South Florida were schooling potential clients in fraud and portraying it as smart business. After all real estate never goes down so everybody wins!

The banks, Wall Street and the regulators didn’t want to know and where willing enablers to a Ponzi scheme they created. Now to solve the problem they are talking about how to reopen credit lines to consumers who are insolvent. Unbelievable.